Commodities Today: Seadrill Disappoints, Oil Service Names Move Lower

Includes: HAL, PBR, RIG, SDRL, UNG
by: Matthew Smith


Highlight the natural gas inventory numbers and what lies ahead with Winter Storm Cato hitting the NE United States.

Discuss the big drop in SDRL shares and why investors are so disappointed.

Point out other names falling in sympathy with Seadrill.

Natural gas inventories fell 162 billion cubic feet last week, and with Winter Storm Cato beginning to hit the northeast today, we should see another draw on natural gas inventories this week. Energy traders remain focused on OPEC and the meetings being held in Vienna. While we have no idea how those meetings will turn out, it is clear that no one wants to cut production at this time even though Iran is set to return to the market and has a very good argument as to why others, such as Saudi Arabia and its Gulf neighbors, should lower production in order to accommodate them as they ramp up production now that sanctions are easing.

Chart of the Day:

Natural gas (NYSEARCA:UNG) is higher by 1% today, but is backing off of today's intraday highs after the inventory data came out. The last week has seen prices retreat by about 5%.

Source: CNBC

Commodity prices are as follows (at time of submission):

  • Gold: $1,197.30/ounce, up by $0.20/ounce
  • Silver: $16.56/ounce, up by $0.007/ounce
  • Oil: $74.20/barrel, up by $0.11/barrel
  • RBOB Gas: $2.039/gallon, up by $0.0072/gallon
  • Natural Gas: $4.455/MMbtu, up by $0.052/MMbtu
  • Copper: $2.9575/pound, up by $0.0005/pound
  • Platinum: $1,228.70/ounce, up by $4.20/ounce

Seadrill Shares Getting Pummeled

Investors are punishing Seadrill (NYSE:SDRL) after the company surprised the market by announcing that they were suspending their dividend. The dividend has been the focus of many over the last quarter or two, but with management saying that the dividend was safe due to the company's rig contracts in place for the next two years many had become complacent.

There were a number of analysts who expected the company to reduce the dividend rate, but we did not see any reports where analysts were predicting that the company would do away with their distributions. The $2 billion that the company will retain will be used to reduce debt and improve the company's balance sheet. While this may seem like an awful move right now, if oil prices remain low then investors might look back at this move as one which helped save the company long term.

While shares are down nearly 20%, investors are ignoring the good news that was included in this report. First off, Seadrill exceeded analyst estimates - which is impressive in this environment. The company also announced that they finalized an agreement with Petrobras (NYSE:PBR), which had been expected by many, but had not been finalized until recently.

Oil Service Firms Fall In Sympathy

With Seadrill shares getting crushed, its peers are falling as well, as investors walk away from the entire industry. Both Halliburton (NYSE:HAL) and Transocean (NYSE:RIG) are hitting fresh 52-week lows on the session, but Transocean is the real story here. While Seadrill is leading the way lower, Transocean shares are lower by about 6%. It has become quite ugly for the oil service companies in the last few weeks, and if oil prices head lower, it could get worse.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.